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Market Wrap

Market Wrap

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Choppy Ranges Prevail

Wednesday followed through on Tuesday's sell-off, producing bearish action. At the end of the day, however, the recent choppy ranges were preserved.

Investors sold an early pop in the markets and sent indices lower, parking them at support ahead of the inventories release at 10:30. The SOX dropped to just above 500, the TRAN to just above 4100, and the SPX to test its 10-sma. Some indices coiled at the bottoms of their ranges, on idle ahead of that number. The VIX climbed as did the TRIN.

It's unlikely that many bears were surprised to see the post-inventory spike, despite a setup that seemed to favor them. With anticipation of a Santa Claus rally well entrenched, the spike was guaranteed on anything but a dismal inventories number. Imagine their surprise, however, when the spike was soon reversed, with financials leading the way to the downside. In addition, homebuilders were "slammed," according to Larry Kudlow's characterization, with the DJUSHB, the Dow Jones U.S. Home Construction Index, closing lower by 3.29 percent.

At one point, Bob Pisani on CNBC commented that every component stock of the BKX, the KBW Bank Index, was in the red. The interest-rate-sensitive sector and others may have been reacting in part to a Greenspan quote taken from a letter, with Greenspan avowing that definitions of a neutral rate were subject to uncertainty, and that it was impossible to know when neutrality had been reached. He further stated that while reaching neutral levels might be appropriate at some times, it wasn't always. This wasn't what investors wanted to hear ahead of next Tuesday's rate-hike decision.

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Wellpoint's (WLP) fiscal 2006 outlook appeared to be below consensus, sending the healthcare sector lower, too, but some analysts noted that comparing the headline number to WLP's previous outlook might be like comparing apples and oranges. Some contended that, minus stock-options expenses, the EPS was actually higher than previously forecast. Others differed: WLP ended lower by 2.82 percent. The HMO, the Morgan Stanley Healthcare Index, ended lower by 1.55 percent. Both acquiring company Boston Scientific (BSX) and to-be-acquired Guidant (GDT) dropped, also pressuring healthcare-related stocks.

Most sectors and indices ended lower, with the XAU, the Gold and Silver Sector Index, and the OSX, the Oil Service Sector Index, two exceptions. The XAU closed higher by 1.91 percent, and the OSX, 0.26 percent.

Annotated Daily Chart of the SPX:

Annotated Daily Chart of the Dow:

The inventories numbers proved to be better than expected. The EIA website reported that crude oil inventories rose 2.7 million barrels; distillate fuel, 2.7 million and motor gasoline, 2.7 million barrels. Crude supplies had been expected to decrease, and all three numbers surprised to the upside. When compared to the average range for this time of year, crude inventories were above the upper end; distillates, in the middle; and gasoline, in the lower half.

Crude immediately fell off pre-inventories number, dropping to test the 15-minute 100/130-ema before rising and falling again, to close at $59.20. Another pressure on crude prices had been a rumor circulating that LOOP, the Louisiana Offshore Oil Port, was not offloading crude since its storage was full. Later information asserted that this rather common occurrence, as one superintendent termed it, concerned only one variety of sweet crude oil. The TRAN's post-inventories reaction proved worrisome to bears, otherwise pleasantly surprised by the market's obeisance to their desires to see lower prices, as the TRAN crept up toward the top of the possible bull flag pullback off its record highs. By the end of the day, the TRAN had reversed course, however.

Annotated Weekly Chart of the TRAN:

A JP Morgan upgrade of Cisco (CSCO) to an overweight rating from its previous neutral one and a positive mention of ATI Technologies (ATYT) in Digitimes helped provide that early pop in the markets. TXN bucked the early trend in many equities, rising into the 10:30 numbers and coiling at the top of its day's range, then breaking higher, but even TXN fell prey to the afternoon swoon. INTC's early pop was soon reversed, and prices confirmed a H&S on its 60-minute chart, dropping afterwards in true short-term bearish fashion, a result not often seen lately. A.G. Edwards had suggested today that INTC might guide in line with previous expectations rather than guiding higher, with that firm's note perhaps responsible for INTC's poor performance in relationship to TXN. By the end of the day, CSCO had closed higher by 1.25 percent; ATYT, lower by 0.94 percent; TXN, higher by 0.27 percent and INTC, lower by 1.94 percent.

As this report was prepared, early news about TXN's update was being released, with analysts agreeing that new was good. TXN narrowed its range to the higher end of the previous range, guiding at $0.38-0.40, from $0.36-0.40. TXN also narrowed the revenue range to $3.56-3.7 billion, up from the previous $3.425-3.815 billion. One CNBC commentator noted that the street was still expecting $0.41 EPS, but that TXN tended to be conservative in its estimates. The conference call had not yet occurred as this report was sent to press, and conference calls can change the tenor entirely, but TXN was then trading $33.95, up from its $33.58 close. INTC benefited, too, trading at $26.27, up from its $26.13 close.

After-the-market news also included XLNX's upward revision of its third-quarter forecast.

Annotated Daily Chart of the Nasdaq:

Economic releases proved light, and that might have been part of the problem. As early as last week, market watchers predicted a sideways to sideways-down bias for the week, with few bright spots to maintain the recent euphoria.

The Mortgage Bankers Association released mortgage applications for the week ending December 2, with the association headlining the release with the information that volume had rebounded after the holiday-shortened Thanksgiving week. The applications survey portion increased a seasonally adjusted 5.2 percent week over week. The applications fell 6.1 percent on an unadjusted basis from the year-ago level, however. The purchase, refinance, conventional and government indices all increased. The four-week moving averages for the market index fell 0.2 percent; for the purchase index rose 1.6 percent and for the refinance index fell 3.1 percent. The average contract interest rate for a 30-year fixed-rate mortgage climbed to 5.84 percent from the previous week's 57.72 percent, and points increased.

In addition, this morning's Challenger layoff announcements may have contributed to the early weakness, with that number revealing that layoffs were down eighteen percent year-to-date, but rose 22 percent in November. Some sources note that layoffs tend to accelerate at the year's end and these numbers are not seasonally adjusted.

Consumer credit was released at 3:00 EST. October's number showed a large and unanticipated drop to $7.2 billion, the largest drop since the Fed began keeping track of consumer credit. Many expected credit to rise by $3.7 billion. Revolving credit fell by 2.4 percent, and non-revolving, by 5 percent. The rising-interest-rate environment may be hitting such purchases as auto purchases, weighing on credit use.

Stock-specific news today included speculation that GM may have talked to Kirk Kerkorian's Tracinda Corp. about possible membership on GM's board, with speculation being that Jerry York's participation might be sought. After the close, the companies confirmed that Tracinda and GM were "in discussions," but they did not offer confirmation that Jerry York would be the representative, if anyone was tapped to serve. GM closed higher by 2.9 percent.

MSFT closed higher by 0.21 percent after losing an antitrust suit in South Korea. In his Wrap last night, Jim mentioned the possibility that MSFT might be close to a deal with TWX's AOL, and that possibility continued to draw attention today.

One development that may have impacted the airline sector concerned a passenger reportedly shot by a federal air marshal at the Miami airport, allegedly after the passenger claimed to have a bomb. A woman, presumed to be his wife, shouted that the man was mentally unstable, according to some reports, but it wasn't clear if the marshal heard her. This occurrence took place just after 2:00 EST. The XAL, the Airline Index, had already begun a slide before that time, but it participated in the late-day bounce along with other indices as news began suggesting that the man had not had a bomb. The XAL closed higher by 0.42 percent.

Tomorrow's big developments include Intel's mid-quarter update, scheduled for 5:30 according to one source. The SOX has been a recent leader to the upside, but the SOX, like other indices, has begun a consolidation pattern under next resistance, so it does not yet provide much guidance.

Annotated Daily Chart of the SOX:

With INTC due to report after the close tomorrow, it may not be likely that the SOX or Dow will break out of their recent patterns. That may make tomorrow difficult to gauge, with much of the day being about positioning ahead of that update. The day's events provide minimal distraction, with only the usual initial claims and natural gas inventories. Earnings have trailed off, and Dave & Buster's (DAB) is one of only seven reporting companies listed by one source.

Continue to watch for breaks out of the recent consolidation ranges, with special attention paid to the SOX and TRAN. Both show hints that they may be in the process of topping out over the short term, with the SOX's possible exhaustion gap and the TRAN's testing of long-term resistance with weekly price/MACD and price/RSI bearish divergences. Trade the chop inside the recent consolidation patterns only if you're an adept scalper, especially tomorrow ahead of INTC. Otherwise, wait for the breakouts, and be sure you're ready to stop out if prices should then immediately reverse course.

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